Bank of England's Saunders edges towards rate rise

A general view shows the Bank of England in the City of London, Britain April 19, 2017.Hannah McKay

LONDON (Reuters) - Bank of England policymaker Michael Saunders on Friday opened the possibility that he will soon join a minority calling for higher interest rates, predicting that both growth and inflation could well exceed the BoE's earlier forecasts.

Saunders, in a speech to small businesses in London, said he had not yet decided for certain how he would vote at next month's Monetary Policy Committee (MPC) meeting.

But he said rate-setters should not use uncertainty about the exact terms on which Britain would leave the European Union in 2019 as a reason to keep rates on hold indefinitely.

So far only one of the MPC's nine policymakers, Kristin Forbes, has backed an interest rate hike this year.

But Saunders' comments suggested he may have been one of the other unnamed MPC members who were close to joining Forbes, according to the minutes from last month's meeting.

He highlighted record employment in Britain and the likelihood that trade and investment will compensate for a slowdown in consumer spending, perhaps by more than the BoE had expected a few months ago.

"I judge that the current policy stance is clearly accommodative," Saunders told members of the Federation of Small Businesses.

"While not prejudging what I or the MPC might decide on monetary policy, a modest rise in rates would still imply that considerable stimulus remains in place, helping to support output and jobs," he added.

Saunders said raising interest rates too late had similar costs to moving too early, distancing himself from colleagues who have stressed greater risks from a premature rate hike.

"I'm not sure that one is a bigger error than the other," he said in a question and answer session.

J.P. Morgan economist Allan Monks said it sounded like Saunders could well vote for higher rates at the May 11 meeting, but Prime Minister Theresa May's shock decision to call a general election on June 8 might also influence his thinking.

Although the BoE operates independently of politicians, economists in the past have said it prefers to wait until after major political events before making changes to monetary policy.

Monks said he maintained his view that the majority of rate-setters will remain cautious for at least the next few months to assess the extent of any consumer slowdown.

Official data earlier on Friday showed retail sales posted their biggest quarterly fall in seven years during the first three months of 2017, as rising prices since last year's Brexit vote put more pressure on consumers.

Saunders said he "would not be surprised" if consumer price inflation reached 3 percent later this year or in early 2018, and said economic growth could maintain a year-on-year rate of 2 percent through this year and next.

The BoE's February forecasts showed growth slowing to 1.6 percent in 2018 from 2.0 percent this year, and inflation peaking at less than 3 percent.

"I want to stress that this prospective near-term inflation pickup does not imply that Brexit Britain will face persistently high inflation. Nor does it signal that the MPC has gone soft on our low inflation remit," Saunders said.

"Over time, the appropriate monetary policy can and will ensure that inflation returns to the 2 percent target," he added.